Avoiding Discounts through Value-based Pricing
Increasing price pressure is a universal phenomenon and many companies struggle to get their prices accepted by increasingly demanding buyers. An effective way to counter this trend is Value-based Pricing. The underlying logic is that if a company can convincingly demonstrate the unique value of its offering to the customer, it is in a far stronger position to charge a price that reflects this value.
Here are the steps you can follow to develop and implement a valued-based pricing approach:
- Assess which impact your product/service has on the customer´s business. The result is a ´customer value model´, e.g. a spreadsheet which details, in financial terms, how your offering affects your customer´s processes and performance. In most cases, you won´t have all the customer-specific data available to do a precise value calculation. Start with the information that you have and make reasonable assumptions. Your model can always be refined at a later stage.
- There are three types of value that you can provide: 1) Cost reduction: E.g. you help the customer save energy. 2) Turnover increase: E.g. with the machine that you sell the customer can produce higher-quality products and charge higher prices. 3) Emotional value: E.g. you help the customer reduce a risk which keeps him up at night.
- Share your assumptions and calculations with the customer and see how he reacts. Will he be surprised, because you are providing a great insight about his business that he was not aware of? Will he strongly contradict you? Or will he discard your information as irrelevant and still focus on the lowest possible price he can get?
- Usually, you will find two types of customers: ´Value buyers´ who appreciate the value and insight that you offer and who are ready to pay a price premium for that. The second group is ´price buyers´. They are less accessible to your value argumentation and a low price is the most important purchasing criterion for them.
- When you know your customers´ value perception and willingness to pay, you can decide which segments you want to serve or not. Given your cost structure, can you, e.g., still make a profit by serving the low price segment? Would it be wise to serve only the value-oriented segment with premium-priced offerings? Or does it make strategic sense to serve both segments with specific offerings ranging from low-priced basic products to premium-priced complex solutions?
- At the end of the day, Value-based Pricing is implemented through Value-based Selling. Salespeople should be aware that value buyers have to be approached differently than price buyers. For the sales conversation, they should always have different options at different price points available. This enables them to, e.g., offer a low-price basic product when a buyers asks for a price decrease, instead of conceding a strong discount for a high-priced premium solution, which erodes profit margins and damages the company´s image.
Value-based Pricing means that a customer cannot get a Ferrari at the price of a Tata Nano!